Monday, April 27, 2009

Spreads were mixed in the US today (as volumes remained light) with IG worse, HVOL improving, ExHVOL weaker, XO wider, and HY selling off (and off the run indices seeing a rise in activity). Indices typically underperformed single-names (though intraday ranges were low in HY and IG) with skews widening in general as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL's skew widened as it underperformed, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed. .

The names having the largest impact on IG are International Lease Finance Corp. (-116.16bps) pushing IG 0.66bps tighter, and American International Group, Inc. (+431.54bps) adding 1.6bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 3.05bps tighter, and American International Group, Inc. contributing 7.38bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Omnicom Group (-30bps) pushing the index 0.31bps tighter, and Southwest Airlines Co. (+12.5bps) adding 0.12bps to ExHVOL.

The price of investment grade credit fell 0.05% to around 96.7% of par, while the price of high yield credits fell 0.4% to around 75.63% of par. ABX market prices are higher (improving) by 0.13% of par or in absolute terms, 0.45%. Broadly speaking, CMBX market prices are higher (improving) by 3.66% of par or in absolute terms, 24.25%. Volatility (VIX) is up 1.5pts to 38.32%, with 10Y TSY rallying (yield falling) 8.2bps to 2.91% and the 2s10s curve flattened by 0bps, as the cost of protection on US Treasuries rose 0bps to 45bps. 2Y swap spreads tightened 2.1bps to 59.5bps, as the TED Spread tightened by 0.7bps to 0.97% and Libor-OIS improved 1.3bps to 86.1bps.

The Dollar strengthened with DXY rising 1.16% to 85.696, Oil falling $1.44 to $50.11 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.06% today (a 1.63% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $6.85 to $906.35 as the S&P is down (855.5 -1.27%) underperforming IG credits (176.75bps -0.05%) while IG, which opened wider at 178.75bps, outperforms HY credits. IG11 and XOver11 are +0.94bps and +8.97bps respectively while ITRX11 is -0.2bps to 151bps.

The majority of credit curves steepened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).

Dispersion rose +28.8bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

49% of IG credits are shifting by more than 3bps and 57% of the CDX universe are also shifting significantly (less than the 5 day average of 63%). The number of names wider than the index decreased by 2 to 42 as the day's range fell to 7.5bps (one-week average 8.28bps), between low bid at 174 and high offer at 181.5 and higher beta credits (-1.92%) underperformed lower beta credits (-2.04%).

In IG, wideners were outpaced by tighteners by around 3-to-2, with 29 credits wider. By sector, CONS saw 24% names wider, ENRGs 44% names wider, FINLs 48% names wider, INDUs 11% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 150.44bps and the latter at 139.72bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 439.22bps from 431.5bps, but remains below the short-term average of 465.56bps, with the HY/XOver ratio rising to 1.52x, below its 5-day mean of 1.54x. The IG-Main spread decompressed to 25.75bps from 24.05bps, but remains below the short-term average of 28.13bps, with the IG/Main ratio rising to 1.17x, below its 5-day mean of 1.18x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 4.2bps to 139.7bps, with 73 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 8.11bps to 232.78bps, with Brokers (worst) wider by 14.38bps to 293.95bps, Finance names (best) wider by 11.38bps to 1027.33bps, and Banks wider by 5.92bps to 292.97bps. Monolines are trading wider on average by 112.55bps (3.29%) to 2947.3bps.

In IG, FINLs underperformed non-FINLs (3% wider to 2.91% tighter respectively), with the former (IG FINLs) wider by 14.1bps to 484.2bps, with 7 of the 21 names tighter. The IG CDS market (as per CDX) is 3.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (172.89bps), with the bond ETFs underperforming the IG CDS market by around 6.1bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.08bps to 150.44bps (with ITRX FINLs -trending tighter- better by 0.69 to 153.25bps) and is currently trading tight to its week's range at 0%, between 157.19 to 150.44bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.05%, between 112.76 to 106.95bps. ExHVOL underperformed LoVOL as the differential decompressed to -1.49bps from -5.57bps, but remains below the short-term average of -1.13bps. The Main exFINLS to IG ExHVOL differential compressed to 44.98bps from 47.51bps, but remains above the short-term average of 44.7bps.

Spreads were mixed in the US today (as volumes remained light) with IG worse, HVOL improving, ExHVOL weaker, XO wider, and HY selling off (and off the run indices seeing a rise in activity). Indices typically underperformed single-names (though intraday ranges were low in HY and IG) with skews widening in general as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL's skew widened as it underperformed, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed. .

The names having the largest impact on IG are International Lease Finance Corp. (-116.16bps) pushing IG 0.66bps tighter, and American International Group, Inc. (+431.54bps) adding 1.6bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 3.05bps tighter, and American International Group, Inc. contributing 7.38bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Omnicom Group (-30bps) pushing the index 0.31bps tighter, and Southwest Airlines Co. (+12.5bps) adding 0.12bps to ExHVOL.

The price of investment grade credit fell 0.05% to around 96.7% of par, while the price of high yield credits fell 0.4% to around 75.63% of par. ABX market prices are higher (improving) by 0.13% of par or in absolute terms, 0.45%. Broadly speaking, CMBX market prices are higher (improving) by 3.66% of par or in absolute terms, 24.25%. Volatility (VIX) is up 1.5pts to 38.32%, with 10Y TSY rallying (yield falling) 8.2bps to 2.91% and the 2s10s curve flattened by 0bps, as the cost of protection on US Treasuries rose 0bps to 45bps. 2Y swap spreads tightened 2.1bps to 59.5bps, as the TED Spread tightened by 0.7bps to 0.97% and Libor-OIS improved 1.3bps to 86.1bps.

The Dollar strengthened with DXY rising 1.16% to 85.696, Oil falling $1.44 to $50.11 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.06% today (a 1.63% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $6.85 to $906.35 as the S&P is down (855.5 -1.27%) underperforming IG credits (176.75bps -0.05%) while IG, which opened wider at 178.75bps, outperforms HY credits. IG11 and XOver11 are +0.94bps and +8.97bps respectively while ITRX11 is -0.2bps to 151bps.

The majority of credit curves steepened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).

Dispersion rose +28.8bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

49% of IG credits are shifting by more than 3bps and 57% of the CDX universe are also shifting significantly (less than the 5 day average of 63%). The number of names wider than the index decreased by 2 to 42 as the day's range fell to 7.5bps (one-week average 8.28bps), between low bid at 174 and high offer at 181.5 and higher beta credits (-1.92%) underperformed lower beta credits (-2.04%).

In IG, wideners were outpaced by tighteners by around 3-to-2, with 29 credits wider. By sector, CONS saw 24% names wider, ENRGs 44% names wider, FINLs 48% names wider, INDUs 11% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 150.44bps and the latter at 139.72bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 439.22bps from 431.5bps, but remains below the short-term average of 465.56bps, with the HY/XOver ratio rising to 1.52x, below its 5-day mean of 1.54x. The IG-Main spread decompressed to 25.75bps from 24.05bps, but remains below the short-term average of 28.13bps, with the IG/Main ratio rising to 1.17x, below its 5-day mean of 1.18x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 4.2bps to 139.7bps, with 73 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 8.11bps to 232.78bps, with Brokers (worst) wider by 14.38bps to 293.95bps, Finance names (best) wider by 11.38bps to 1027.33bps, and Banks wider by 5.92bps to 292.97bps. Monolines are trading wider on average by 112.55bps (3.29%) to 2947.3bps.

In IG, FINLs underperformed non-FINLs (3% wider to 2.91% tighter respectively), with the former (IG FINLs) wider by 14.1bps to 484.2bps, with 7 of the 21 names tighter. The IG CDS market (as per CDX) is 3.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (172.89bps), with the bond ETFs underperforming the IG CDS market by around 6.1bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.08bps to 150.44bps (with ITRX FINLs -trending tighter- better by 0.69 to 153.25bps) and is currently trading tight to its week's range at 0%, between 157.19 to 150.44bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.05%, between 112.76 to 106.95bps. ExHVOL underperformed LoVOL as the differential decompressed to -1.49bps from -5.57bps, but remains below the short-term average of -1.13bps. The Main exFINLS to IG ExHVOL differential compressed to 44.98bps from 47.51bps, but remains above the short-term average of 44.7bps.